Bitcoins, a Crypto-Geek Ponzi Scheme

Now that U.S. Senators Charles Schumer and Joe Manchin are advocating a crackdown on Bitcoins (a peer-to-peer electronic currency), the mainstream media is starting to pick up on the story. Our informed readers here have probably heard something about the issue by now, but may be wondering what the heck these things are. There has been much debate about whether bitcoins are a legitimate digital currency or an Internet era scam, so we will examine the issue of in an effort to make some sense of it.

Bitcoins were created by an anonymous person, purportedly from Japan, going by the name of “Satoshi Nakamoto.” On the surface, bitcoins are one of the first successful implementations of a digital currency created independent from any government or central bank and therefore is resistant to government control. Bitcoins are championed by cyber libertarian/anarchists who want people to be able to spend money as they deem fit. There is evidence that bitcoin currency is having some success in these endeavors but the currency is primarily used for anonymous dollar-denominated trading and speculators. More specifically, bitcoins are used as an anonymous payment scheme for activities prohibited by government. For example, bitcoins could facilitate the following activities:

Allowing people to donate money to WikiLeaks without worrying about the U.S. Government shutting down their PayPal accounts

Allowing American citizens to gamble online using foreign gambling sites and bypass a U.S. Government ban on online gambling or the transfer of funds to offshore gambling sites

Tax evasion. Income paid in bitcoins is nearly as untraceable as cash exchange and the bitcoins can be converted instantly to cash to minimize volatility.

Bitcoins have the following characteristics that ensure its success:

Bitcoins work in a decentralized peer-to-peer environment

Bitcoins can only be spent once per owner and the transactions are verified by bitcoin peers running the open source bitcoin software

Every bitcoin transaction is logged in a global peer-to-peer registry

Bitcoins can be generated by anyone running bitcoin “mining” software but the difficulty is increasing exponentially as time goes by and as more people attempt to generate bitcoins

The maximum number of bitcoins that can be generated will only be allowed to approach 21 million.

The Bitcoin Bubble

The bitcoin supply limit is designed to guard against currency inflation and avoid situations where governments print out more money while devaluing existing currency. The problem is that a limited supply will become outstripped by demand, creating hyper deflation. While deflation (the increase in currency value) sounds like a good thing, it is highly unstable because a currency that rockets in value must come crashing down at some point.

Sure enough, the bitcoin bubble has inflated 483-fold in a span of just over 8 months from October 1 2010 to June 9 2011. Even more surprisingly, bitcoins have skyrocketed 9667-fold from a value of $0.003 to $29 since it began dollar-denominated trading in April 2010. See the chart below generated by BitcoinCharts.com.

That means anyone who jumped in at the beginning in April 2010 and bought $1000 worth of bitcoins would theoretically have $9.6 million in bitcoins. That certainly sounds like a tempting bet, but be warned that it’s only a matter of time until the bubble pops and the value corrects itself to a tiny fraction of its peak. Collecting that $9.6 million today might be very tricky, and the bitcoins will probably have to be sold off gradually because any attempt to sell a large number of bitcoins for dollars could trigger a massive sell-off and rapid devaluation in price.

Exponentially Higher Benefits for Early Bitcoin Miners

There was another way to obtain bitcoins, but those days are long over. In the early days of bitcoins before they could be had for fractions of a penny, computer geeks with fast graphics processors designed for high end gaming could generate their own bitcoins through a process called “mining.” Since the pool of bitcoin miners were few in the beginning and they all had a statistically equal chance of gaining a bitcoin if they had equivalent computing hardware, it was relatively easy to generate bitcoins. So easy in fact that nearly 3 million bitcoins were generated in 2009 — 13% of the total number of bitcoins allowed. The number of people sharing those 3 million bitcoins were relatively few, because not many people (even hardcore computer and information technology geeks) read cryptography mailing lists.

So who were the folks that knew about bitcoins in 2009 and had the first crack at getting a significant fraction of those 3 million bitcoins? It was the cryptography geeks. More specifically, the developers who wrote the first bitcoin mining software probably paid themselves by having the first crack at generating bitcoins with almost no competition. It would also be no surprise if one of those developers were the actual person behind the fictitious character “Satoshi Nakamoto” (who actually may or may not be Japanese). I agree with those who bet that he or she is not Japanese, as assuming that identity would only make it harder for him or her to be tracked down.

Conveniently Anonymous

We can effectively think of “Satoshi Nakamoto” as being on top of a Ponzi scheme. But unlike physical world Ponzi schemes where the creators almost always end up in jail, the creator of bitcoins is anonymous and went out of his way to use anonymous email accounts through TOR networks to anonymously publish a whitepaper on bitcoins. The next wave of speculators who bought early into the bitcoin scheme and/or tried to generate their own bitcoins at a much slower pace (but still much higher than today) were the next tier in the scheme and they can probably walk away with some nice earnings if they pull out before the bubble bursts. At this late stage when the mainstream news is reporting on bitcoins, we have speculators trying to buy in at extremely high valuations hoping to sell to the “greater fool”.

Can Bitcoin Survive After the Bubble Bursts?

It’s only a matter of time when bitcoin value comes crashing down to earth and when that happens, does that spell the end of bitcoins? Given the fact that there will still be demand for an anonymous currency transfer scheme and people will still want to gamble online and buy illicit drugs online, it’s quite possible that bitcoins (or some derivative technology) can survive after a massive bubble correction. Someone could publish a proposal to gradually add more supply to balance demand and so long as a critical mass of the world’s bitcoin users go along with it, the deflation problem might be solved. But by that time, a lot of people will have lost their shirt trying to get rich quick with bitcoins.

George Ou

Comments

I feel like the concept borders on smart. Attempting to male some kind anonymous currency – a Tor / BitTorrent for money. But, just borders. I feel there’s a lot of people playing with video game money.

Typo in Japan

George OuJune 11, 2011 at 6:44 pm

Thanks Rob, I fixed the typo. Not sure why the Chrome browser didn’t catch that typo in the editor.

As for the concept, its pretty much evil genius. The Ponzi scheme aspect is nothing new, but the anonymous aspect of the founder is very interesting.

John DoeJune 12, 2011 at 4:07 am

While you’re at it, maybe you could correct Satoshi Nakamoto’s surname as well.

In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.

A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters profit from the usefulness of a stable and widely accepted p2p currency.

—

You can’t just call any thing where early adopters benefit in the event of the asset appreciating a ponzi scheme.

Bitcoin FailJune 14, 2011 at 5:35 pm

“Early adopters profit from the rise in value. Late adopters profit from the usefulness of a stable and widely accepted p2p currency.”

Bitcoin has every single element of a ponzi scheme. It’s just the first of it’s kind.

SteveoJune 21, 2011 at 1:20 am

If its the first of its kind, then its not a ponzi scheme. Its the first of its kind.

But it really isn’t the first of its kind. Its just another currency with a little bit more accuracy at recording ‘working worth’, then say, a fictional fiat currency like the US dollar. Sans being hacked and rolled back by trading sites that manage it (but keep in mind that Bitcoin itself isn’t hacked -just the user’s accounts). No government can step in and just say, “Today there will X number of dollars injected into the system”. No war or political agenda is going to influence its value then actual trading value between users. Scary, isn’t it? Don’t be surprised when it gets outlawed along with everyone else’s related “thought crimes” by the governments at large.

BobJune 21, 2011 at 5:43 am

Steveo,

Glad to see an intelligent rebut to this article. It would have been cool if the writer of this article had contemplated the relationship of the USD with a ponzi. Well, perhaps Benny Bernanke will force his hand on that with QE66666666666666.

George OuJune 12, 2011 at 6:17 am

@John Doe,
Sorry, wrong alias, corrected.

@Admin
I’m sure the victims can take comfort that their lost life savings went to a great cause of enabling people to buy drugs and gamble online.

Adam JJune 12, 2011 at 9:17 am

John, I think you are being a little bit if a drama queen. In order to buy Bitcoin, it requires a bit of knowledge and learning – it’s not something you can just get in to by calling a broker. People who take the time to do this will likely have a good handle on associated risk in whatever they buy and the chances of them betting life savings that they cant afford to lose is probably very very small. I am a higher risk investor, and am considering buying and I could afford to lose all my savings, but i’m still certainly not going to put in more than 10% of my savings in to this.

AminJune 12, 2011 at 6:55 am

What victims? People are investing based on their speculation. No one is guaranteeing them any thing. As for what it’s used for, ANY currency can be used for purchasing drugs and gambling. If governments become convinced that that is all bitcoin is used for as you are suggesting, then they’ll try to crush it, and you can look forward to being stuck with fiat currencies for another few decades.

You need to give people freedom of trade if want to see innovation.

George OuJune 12, 2011 at 8:52 am

“What victims? People are investing based on their speculation.”

The same can be said of all Ponzi scheme losers and people who lose money to Nigerian scams. It always involves some form of greed and poor decision making on the part of the victim. That doesn’t mean they’re not victims and it doesn’t mean the Ponzi scheme architect isn’t a criminal.

Adam JJune 12, 2011 at 9:24 am

But your point is based on the idea that people who buy Bitcoin are being promised a return on their investment, this is not the case. People are looking at it as a speculative investment themselves, not being sold the idea by a Bitcoin PR front.

George OuJune 12, 2011 at 9:41 am

Adam, I never claimed that people were promised a return. As I said, victims of these scams were victims because of their own greed. Most fraud victims had their greed taken advantage of. The “greater fool” theory which I mentioned in the post means that all the victims were hoping to sell to an even greater fraud. The problem is that almost everyone ends up a victim except the people near or at the top of the pyramid.

But again, the fact that the victims were greedy and reckless doesn’t mean that the perpetrators of the scam are exonerated. But in this case, they’ll probably never be caught.

AminJune 12, 2011 at 9:56 am

George, you’re wrong. There’s no analogy to the Nigerian scammers. That you claim there is means you’re basing your arguments on a lot of ignorance about what constitutes fraud.

Nigerian scams make fraudulent guarantees to people to get them to part with their money. No one guarantees those who invest in bitcoin any thing. Their investments are based on their own speculation about its future value, which is based on real data on its past price performance and the technical details of the currency.

George OuJune 12, 2011 at 10:40 am

So how many bitcoins have you managed to generate or buy :).

MatthewAugust 11, 2011 at 11:17 pm

I’m a trader on the normal financial markets and I can tell you that you can easily loose money on real currencies and equity markets too 🙂 65% drop in a company or country’s currency isn’t that uncommon.

Remember the disclaimer: Don’t invest more than you’re willing to lose 🙂

Also, Amin is correct. You mention ‘greed’ where is the greed with bitcoin? There is no promised return so nothing to generate the greed.

BlindwebJune 12, 2011 at 9:48 am

I agree with Amin. All of a sudden every failed company and failed experiment fits into people’s idea a ponzi scheme. Life on earth is also apparently a ponzi scheme. Some day it will all die off. Therefore it was pointless in the first place. Early investors in any corporation benefit the most. Every geek had to decide whether they wanted to commit their computing resources to bitcoins or any number of other projects they could have. The real bubble is in financial illiterate people calling everything a ponzi scheme.

George OuJune 12, 2011 at 10:42 am

Right, and the founder of Bitcoin is so confident that this scheme is legal that he/she went out of their way to be anonymous.

ronJune 16, 2011 at 12:36 am

No, their just not confident that the government won’t illegally shut them down, or try to make them illegal retroactively, like they did with Liberty Dollars.

corxiJune 12, 2011 at 12:15 pm

The debate seems to have shifted from what is and isn’t Ponzi here…
In my view, if the Bitcoins architects would have worked at the project, tested it, presented it to the world then release the mining software to all at the same time, it would have been a hugely more credible platform. Since the programmers bagged 3m coins or more when it was in it’s infancy, as far as I’m concerned, it loses credibility…

AminJune 12, 2011 at 9:32 pm

They did release the mining software to the world at the same time. It became an open source project, and was publicly announced, before mining began.

It’s just that not every one year about it when they announced it, and most that did hear about it didn’t get involved in the community.

AminJune 12, 2011 at 9:33 pm

* “not every one heard about it”

Ha HaJune 12, 2011 at 4:48 pm

I love it! You’re all so smart… spotting the ponzi scheme and the bubble like you’re so clever. When you along with every other clueless hack are spouting the same idiotic arguments (early adopters are going to make millions) that just tells me bitcoins are legit. Thank you.

Ha HaJune 12, 2011 at 4:57 pm

p.s. If only everybody could come up with a way to print gold then we could solve the pesky problem of gold’s ‘deflation’ too. Boy, you really thought this through didn’t you.

George OuJune 12, 2011 at 8:45 pm

Gold is not a currency. We stopped using the gold standard because there wasn’t enough gold to denominate all of the dollars.

AminJune 12, 2011 at 9:34 pm

Do you always believe what you’re told by the banking elite?

Uncle BobJune 13, 2011 at 12:33 am

Your right, in one way, gold is NOT currency its money. but in reality gold, and silver, is the only REAL money. I think everyones missing the point. its not a ponzi scheme any more than the US Dollar is a ponzi scheme, which it is. SO, i put to you that the bitcoin is the CURRENCY OF THE INTERNET! you want to buy stuff in the US, you use US dollars, you wanna buy stuff in the UK, you use pound sterling, you wanna buy things on the internet, you use BITCOIN!

George OuJune 13, 2011 at 1:40 am

“you wanna buy things on the internet, you use BITCOIN!”

Correction. If you want to buy illegal services and products on the Internet, you use bitcoins with a substantial markup in prices due to the volatility and risk of bitcoins. But let’s get real here, nobody uses bitcoins for the biggest markets on the Internet such as Amazon, Ebay and virtually every other E-Commerce site. They all take dollars via credit or paypal.

arseeMay 5, 2012 at 8:12 am

fuck off and die you prick.

FaustusJune 22, 2011 at 8:08 am

No, there was plenty of gold to denominate the dollars. The State eliminated the gold standard because it prevented them from inflating the money supply (dollars) which, by statute, had to be equal to a certain weight of gold or silver. When you break the link between goldweight and silverweight, you can print as many dollars as you want. The State and its contractors win, the people have their savings devalued. Gold and silver isn’t currency, you’re right: it’s actual money.

BladeMcCoolJune 13, 2011 at 2:33 am

Welcome to the global crypto-anarchy. Taxes just became optional. LOL. Find a local, powerful, phyle (likely your local city-state council) and join it. Nation states are over. 🙂

HephaestusJune 24, 2011 at 8:09 pm

You have been reading to much Neil Stephenson … I do however love the idea of governments and banks losing all control over the money supply. It looses them all control over everything including people.

I think that is why there has been so much in the way of news and hacking recently, corporations, banks, and governments are afraid of Bitcoin. The problem is the more this shows up in the news, the more people will learn of it and say hey this might be fun to try.

Attempts at hacking the system will also only make it stronger. For now this is a geek thing. In the future it will grow and become more robust and less hackable as the flaws are found and fixed. It will more than likely become idiot (reads user) friendly, at which point anyone can use it.

We are starting the Kickstarter for Bitcoins and seeking cool projects to include: visit http://bitstarter.co and sign your project up!

Thanks!

eeksJune 13, 2011 at 9:41 pm

Pretty sloppy and half-baked article. If you call something a Ponzi scheme, you should at least have an understanding of what a Ponzi scheme is. Which you don’t, demonstrably so. Pepper in your use of “scare quotes” as perjoratives (e.g. the word mining becomes “mining”), it’s just not a helpful piece.

This is the first article I have ever read on higtechforum.org and if it’s illustrative of the effort you put into articles, into understanding the relevant issues, in this case economics, the basic working of currencies, the basic workings of supply/demand, the difference between a bubble and a Ponzi scheme, well, I guess I don’t see the point. You may be a swell writer on other subjects, but you are so far out of your depth here. Read up or don’t post.

George OuJune 14, 2011 at 4:18 am

That’s a pretty brutal and sweeping critique, but you would make a better case if you pointed out specific flaws in the article. Pick one or more points that you believe to be flawed and point out where it is flawed.

tom turndailJune 14, 2011 at 10:46 pm

So this, by the author is bad?
“Allowing people to donate money to WikiLeaks without worrying about the U.S. Government shutting down their PayPal accounts”
Geez, this whole article stinks of government propaganda …

George OuJune 14, 2011 at 11:28 pm

When did I say that was a bad thing? I don’t support WikiLeaks but support people’s right to give to it. But that wasn’t the point of this article if you read beyond the first bullet items.

Interesting how some of them suggest calling the police :). I thought they didn’t need the police or any form of government.

Ron WanJune 29, 2011 at 12:27 am

“didn’t need the police” Ouch that hurt, it’s just that private security and the DRO’s (dispute resolution organizations) aren’t set up yet.

Can I just say I appreciate your article and I hope you are wrong but you bring a healthy bit of skepticism.
After reading it and all the comments I feel it is either a well designed free market currency or the greatest Ponzi scheme of all times( Social security accepted of course). I wish I could tell the merchandise transactions from the speculation transactions but it is all private. I will keep an eye on it.
Thanks for writing it.

Ron WanJune 29, 2011 at 12:40 am

Oh I forgot to mention, I hope it is a successful currency but the gain in value makes me nervous. A good currency usually has stable prices. I would hate to stamp merchandise in the morning with a BTC price and then do it again at lunch. That is a real issue.

George OuJune 29, 2011 at 2:51 am

Thanks for your rational comments Ron.

I think Bitcoins has elements of a legitimate improvised free market currency, but it has a humongous risk/scam element associated with it as well. That’s why in my conclusion, I say that Bitcoins (or something similar) might go on to survive after a huge crash if it can be adjusted to be more stable.

Some of the gold-standard proponents say that zero inflation is a good thing and that the instability of Bitcoins is due to its lack of scale and only a few owners of the currency can make a huge splash. I have to be honest and say I don’t know if the merits of a gold-backed system is valid or invalid, and I acknowledge that much of the Bitcoin instability is due to the fact that it lacks scale, but Bitcoins has some undeniable problems.

The fact that there is so much room for corruption concerns me. MtGox limiting people to $1000 withdraw concerns me. The fact that the early founders were able to walk away with a huge stash concerns me. Yes I understand that the founders have some plausible deniability because they were transparent from the beginning, but they knew full well that the obscure nature of Bitcoins meant that only they got to generate the wealth in the early months/years. All these things should be of concern to any rational person who doesn’t already have a huge stash of bitcoins. If you already have a stash, your concern is the bubble bursting.

I’m just lollin’ at all the tards in here trying to justify themselves. What a ridiculous speculation mess. Welcome to Greater Fool Theory, everybody.

No. Don’t reply to this with some retarded bullshit about how it’s “the currency of the Internet”. The currency of the Internet is fucking MONEY, like everywhere else. Bitcoin is not money. Bitcoin is shit. Amazon won’t take Bitcoin. Paypal won’t take Bitcoin. My fucking landlord won’t take Bitcoin, and neither will my grocery store or my ISP. (Can you imagine sitting around at the grocery store waiting the several hours for a Bitcoin transaction to go through?) My bank obviously won’t take Bitcoin. Nobody I know will take Bitcoin. I sure as shit won’t take Bitcoin.

Bitcoins for $.003 are overpriced by $.003, and it’ll be funny to watch the bubble pop when the big hoarders decide to sell off to the last few true believers.

MikeJune 16, 2011 at 4:43 pm

The US dollar has no backing, except the promise of the government that its good for use as tender. All currency is only as valuable as the number of people that accept it. Nearly every person/business in the US accepts the US dollar as currency. When that goes starts to fade and only 80% or 75% accept it (they’d rather accept credit instead) then the US dollar starts to fail as a currency.
If the world stopped trading crude oil in US dollars, guess what? Our currency becomes shit. Its all about whether or not businesses/individuals/other countries accept the currency.
Unfortunately, because bitcoin is p2p and doesn’t use a centralized bank, I have a feeling when Bitcoin starts getting big, the US government will simply shut it down illegally.
They will say its because of all of the illegal activities it promotes, but the US dollar is no different.

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people seem to be missing the real point of bitcoin – that you can actually trade bitcoins for legitimate services, which a lot of companies are starting to do https://en.bitcoin.it/wiki/Trade
it’s not like it’s just satoshi in his garage that accepts them. you can trade bitcoins for USD (or any other currency) if you want to. yes, bitcoins are money.
personally, i’ve noticed how in the united states they’re cracking down on poker sites, and the government here in australia is considering doing the same. but it’s my money, and i should be able to do what I want with it. so i can definitely see the value in an anonymous currency that the government can’t control.
i don’t consider bitcoin a ponzi scheme. in a ponzi scheme, a man puts an ad in the newspaper saying that he will increase your money by 10% in a week. you send him $1000 and you get back $1100 within a week. you think to yourself “this is great, i’ll send $3000”. little do you know, the guy is actually just sending you money from another person who joined the scheme. eventually, when you and a few other people send mr. ponzi $10 000, he decides that’s enough money, and he skips the country.
how is this different to bitcoin? mainly, if satoshi leaves the country, nobody cares. people can still trade bitcoins for goods and services, and nobody has given him $10 000. perhaps there will be a market correction if he sold all his bitcoins at once, but similar things can happen with any market. similarities between bitcoin and a ponzi scheme seem to be very few.
i don’t think that just because satoshi wants to remain anonymous, that makes him a criminal or means he had bad intentions. people want to remain anonymous for a range of reasons. some have an aversion to celebrity. perhaps he knew he just didn’t want to continue his involvement in bitcoin after it was originally developed. maybe he just didn’t want people bothering him when he became mega-rich from selling all those $25 bitcoins. or he preferred the work on bitcoin to be separate from his current public identity. there are many reasons for a man to be anonymous.
i believe bitcoin is the future of money, because when you have a bitcoin, only you choose how it will be used. and if bitcoin gets shut down, there will be something similar which will rise up to fill the gap. i don’t really know what the consequences will be, but my guess is that they will probably be big.

libertariancoloredglassesFebruary 12, 2012 at 3:34 pm

Just one bit of color to add to this. When they “cracked down” on pokerstars what they found is that the founders had stolen millions of dollars from users accounts. Those people are never getting their money back. Im not saying that the government should smash the internet. But the issue is significantly more complicated than a libertarian is ever prepared to admit.

Rube SuckermanJune 18, 2011 at 10:11 pm

I guess Bitcoin has replaced World of Warcraft as the new hobby for computer nerds.

A currency that fluctuates in value by a factor of 20:1 within weeks is not a currency I want to do business in.

I’ll stick with the dollar, backed by the US armed forces and several thousand nuclear weapons, thank you very much.

dude52December 25, 2011 at 6:59 pm

And those nuclear weapons are the reason China allows the US to owe it a trillion dollars ? And also allow the US to print money like there is no tomorrow ?

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CarlJune 21, 2011 at 1:43 am

In a pyramid scheme, you have to pay upfront, with the expectation that you can then charge several others that come later to the game, thereby recouping the money you initially paid many times over. For this to properly work, it would need an unlimited supply of people willing to give their money to that scheme. Since there isn’t an unlimited amount of people, much less people dumb enough to join, this will eventually fall over after having moved a lot of money from later to earlier adopters of the scheme.

In a Ponzi Scheme, a broker convinces people to invest in his fund, promising huge returns. In fact, these returns appear only on the paper. Initially, returns to some clients are paid out of the investments of other clients, but since after a short while the actual money in the fund won’t be nearly as much as the money that should be there according to the paper, it will eventually fall over, leaving investors hugely out of pocket.

BitCoins are neither. BitCoin wants to be a sort of currency, something you can use to buy products (legal and illegal). Since its value is not backed by anything, it is solely dependant on what people are willing to pay for it, or solely up to market forces.

For a long time, BitCoins were widely ignored, many people (like myself) never heard of them, until they came to the attention of the masses mainly due to an article describing how someone can use them to buy illicit drugs anonymously.

Suddenly, demand sky-rocketed, and since supply was virtually fixed (the total amount of bitcoins grows currently at a rate of 300/hr), so did the value.

Investing in bitcoins is not the same as investing in a ponzi scheme, but it is an extremely risky commodity, as its value is backed by nothing more than trust.

Still, even as a currency, BitCoin has several disadvantages:
– The highly volatile value makes it a risky business for all parties involved.
– A currency should encourage people to trade. However, if you expect that its value will go up with time, people will hold on to the BitCoins.
– There is no promise that BitCoins will be accepted in the future.

I see BitCoin as a very interesting experiment. Not more, but nothing more sinister either.

George OuJune 23, 2011 at 8:02 am

“In a Ponzi Scheme, a broker convinces people to invest in his fund, promising huge returns. In fact, these returns appear only on the paper.”

That’s what MtGox is effectively doing. They convince people to invest in Bitcoins by giving the pretense that they’re a legitimate exchange. But they cap you to a $1000/day withdraw limit which effectively means that there is no way you could escape a bubble burst. MtGox cannot even come close to paying even a small percentage of their customers who try to cash out at near peak value. They’ll allow them to cash out a very small amount but by the time they try to collect the next day, the bulk of the remaining Bitcoins won’t even be worth the electrons used to store them.

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JawelJune 28, 2011 at 6:39 am

A Ponzi scheme is a specific type of fraud which involves deceiving late investors into thinking that real earnings are being produced when in fact the earnings come solely from newer entrants into the scheme. It is therefore a zero sum game.

You have not demonstrated these properties in relation to Bitcoin. Firstly, how is bitcoin deceitful in any way when the code is open source?

Secondly, how is money transferred from late entrants to early entrants? Nobody is told they will be paid for holding Bitcoins and nobody does get paid for holding Bitcoins, so this property of a Ponzi scheme is clearly absent from Bitcoins. You only get “paid” (in dollars etc) from Bitcoin if you sell your Bitcoin; with a Ponzi scheme, in contrary to that, this is when the payments stop. So Bitcoin is the opposite of what happens in a Ponzi scheme. Bitcoin “profit” comes from asset appreciation as the currency becomes more accepted, more useful and therefore more valuable. That’s not what a Ponzi scheme is.

Someone above has explained that it’s not a zero sum gave so I’ll end here.

JawelJune 28, 2011 at 6:49 am

“That’s what MtGox is effectively doing. They convince people to invest in Bitcoins by giving the pretense that they’re a legitimate exchange. But they cap you to a $1000/day withdraw limit which effectively means that there is no way you could escape a bubble burst. MtGox cannot even come close to paying even a small percentage of their customers who try to cash out at near peak value.”

Why do you think Mt Gox is not a legitimate exchange? And why does the actions of one corporation make any difference to whether or not a currency is a fraud? Saying that Mt Gox is fraudulent and therefore Bitcoin is fraudulent is like saying the dollar is fraudulent because of Charles Ponzi’s scheme. In other words, it’s insane.

The $1000/day withdrawal limit does not stop you selling more than $1000 worth of bitcoins. It just means you can’t withdraw the cash straight away. There is nothing to prevent you from escaping a bursting bubble. In fact, there’s nothing forcing you to use Mt Gox at all. Do you realise Mt Gox is not Bitcoin?

Can you prove that Mt Gox cannot pay people who try to cash out at the peak? I doubt you can, but in any case, that’s not what an exchange does. They don’t buy and sell Bitcoins, they provide a marketplace where other people can buy and sell to each other. So if you want to sell at $30 and someone wants to buy at $30 then you can sell. If there is nobody willing to match your offer then you can’t sell. It is not for the exchange to buy whatever you want to sell at whatever price you demand!

libertariancoloredglassesFebruary 12, 2012 at 3:11 pm

Listen to what you just said: “the 1000/ day withdrawal limit does not stop you selling more than $1000 worth of bitcoins. It just means you can’t withdraw the cash straight away.” ….ever heard of a run on a bank?
As an economist I always though that cryptogrophers were smart…clearly i was mistaken.

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oldtribeJuly 13, 2011 at 7:34 pm

My problem with Bitcoin is I DO read the crypto groups, etc., and I AM a computer expert, an old one – helped design the Internet (yep, that old), helped write email – etc., etc. My computer is mindbending fast, has a serious Nvidia graphics processor too – signed up for BitCoin early on, ran the program on one “OhMyGod” machine and two just super fast, but older, machines. After 5 1/2 months NOT ONE COIN HAD BEEN MINED. Examined the code. It became clear to me that the folks who started the ball rolling, God bless ’em, had access to the kind of computing resources I was managing when I was the Network Manager of a major research organisation at a major State University. We shared computers with NASA, and they still do. I’ll bet if I was still working at “the Center” there would have been some BitCoins mined…
The continuous poster who is so certain a crime is occurring is just misinformed, or uninformed. No crime, just real big brains, and really bigger computers. I’m from the Stalling school of Internet Politics – free as in freedom, not as in free beer…
Two final observations: 1) the model is too small and the individual coins are too hard to get and too valuable, this will discourage use, and 2) Because of this it’s easy for those who cannot grok the big picture to have their paranoia antennae go up – this includes 100% of all politicians and their minions.
Because of these two points, and the fact that BitCoin is unstoppable except by using the illegal wiretaps Bush and Obama have placed on us you can expect friction sooner rather than later.
Good luck with the best idea and non-fiat exchange system since sliced bread. It ain’t money, gold is money, but if folks will take it’s close enough!

This article is so misleading, and wrong on so many points. Many things in the world can be used for evil, but many (most?) can be bought at the hardware store, 7-11, or grocery store. Read hxxps://en.bitcoin.it/wiki/FAQ

[…] strong responses. Depending on whom you ask, Bitcoin is the “future of money,” a “crypto-geek Ponzi scheme,” an “online form of money laundering,” or a tool for “libertarian hipsters […]

dude52December 25, 2011 at 6:56 pm

Bitcoin is not a Ponzi scheme.
On the Issue of “early adopters gaining more on account of newer adopters”: lets compare this to gold mining in the wild west – the first miners earned a lot more than those that came 20 years later – so does this mean gold mining is a Ponzi scheme ?

On the Issue of : “It’s not fair mining – whoever owns the more expensive computer hardware – mines more bitcoins”, well whoever got the better mining machines – mines more gold – is that fair ?

Just a few things to think about – It doesn’t matter who mined the huge amounts in the beginning – It will circulate eventually around the people… Still better than your government printing money (being the sole “miners” of your country’s money and selling it off to the people)

libertariancoloredglassesFebruary 12, 2012 at 3:28 pm

Um, it does matter who mined more in the beginning. One of the major features of any currency that limits supply is that there is an incentive to hoard. There is no incentive to circulate that currency. This is only exacerbated by the fact that there are few (and even at that flawed) market mechanisms that would promote circulation, and that fact that coints liquidate on use. One of the things that needs to be mentioned here is that the point of a currency is not to make the holder rich (by which i mean hiding it in the mattress and still having it accrue value), its to facilitate exchange.

Mark UzickJanuary 2, 2012 at 7:16 am

All fiat currencies are Ponzi schemes or, more acuratly, they are financial bubbles like a stock in a shell corporation or a corporation with ficticious earnings and assets that gets bid up in price because of rumors, leaving the gulible late-comers as the bag-holders.

Legitimate money, just as legitimate securities, must be based on something of real value; in the case of money, that something should preferably be of stable value like gold.

libertariancoloredglassesFebruary 12, 2012 at 3:14 pm

Libertarians need to learn economics, or failing that to simply eyeball the hard data themselves instead of reading emails from the mises instutute. I say this bc only someone who hasn’t examined the data could come to a completely boneheaded conclusion like “the value of gold is stable”

libertariancoloredglassesFebruary 12, 2012 at 3:18 pm

Since, I figured you wouldn’t actually read anything that caused any cognitive dissonance whatsoever (another libertarian ideal to go along with freedom) here is the data posted for you so now all you have to do is click a link…go on…. do ettt. do ett.http://www.thumbcharts.com/1333/gold-and-silver-prices-since-1915.
This also includes silver prices if you are one of those truly weird Paulite Bimetallic people.

curiousJanuary 25, 2012 at 4:14 am

I investigated bitcoin but before I could convince myself to invest any dollars I hit a snag. In the early days miners earned their bitcoin, they were rewarded for their computer time. As one responder pointed out, they are using some fine computing equipment to continue mining as of today. But what happens after all mining is completed? What incentive would they have to continue supporting the system? What happens to bitcoin when the people with the big iron realize they’re no longer getting paid? Will the whole system collapse if they decide to sell out? Don’t be so quick to say, “Surely by then there will be so many people and resources involved the system will sustain itself.” Who could predict that and why would I believe them? So, even though I was intrigued I declined to wager any dollars I worked hard for because in my heart of hearts I do not believe that the system is sustainable.

George OuJanuary 25, 2012 at 4:19 am

Also, there is no known mechanism for replenishing lost bitcoins. Once a bitcoin is lost (e.g., someone’s hard drive crashed and data was lost without backup), there is no way to regenerate that coin.

curiousJanuary 25, 2012 at 4:37 am

The age old backup problem, which is really an education problem. I was willing to make digital copies offline, so that didn’t apply to me personally but it certainly did contribute to my skepticism of a broad support base. Imagine how horrible the theft problem would grow if people used their email to backup their bitcoin wallets? That is how most people do backups of their important data these days.

barrettFebruary 25, 2012 at 9:26 pm

This issue is intended to be solved by transaction fees by miners. Several possible issues can arise here: the difficulty of arriving at a stable transaction fee, miner collusion (even block chain forks?), multi-tiered transaction fees (read: transaction auctions), etc. Until these issues are resolved, in my mind bitcoin is either entropic, or it is destined for gross monopolization of its servers. Currently, the open source nature of the bitcoin network is paradoxically its greatest strength and greatest weakness. I believe these issues can be solved. Whether they will be solved by bitcoin or by bitcoin’s successors is anyone’s guess. I believe wholeheartedly in the concept of bitcoin. But he concerns of long-term network sustainability under the current protocol are what keep me on the sidelines.

AnonymousApril 6, 2012 at 10:28 am

We can effectively think of the European Central Bank as being on top of a Ponzi scheme. But unlike other Ponzi schemes where the creators almost always end up in jail, the creator of euros is an intergovernmental body that doesn’t have to follow the same regulations that normal citizens have to follow. The ECB started this Ponzi scheme by selling Euros for national currency. At this stage, there was no Euro cash yet – The Euro started as a purely virtual currency which could only live on bank accounts. The next wave of speculators who bought into the euro scheme who were able to get euro cash were the next tier in the scheme and they can probably walk away with some nice earnings if they pull out before the bubble bursts. At this late stage when the mainstream news is reporting on euros, we have speculators trying to buy in at extremely high valuations hoping to sell to the “greater fool”. In the end, the whole Euro bubble will burst because nobody will want to buy Euros anymore and because Euros are worthless, like bitcoins. Then all those who have bought Euros will be fooled.

rykellimOctober 29, 2016 at 12:51 am

This article got most of the facts about Bitcoin right in the beginning, but fails in the end when stating that Bitcoin will be of considerably lesser value after a market crash. Time and hindsight have shown us that Bitcoin has become MORE valuable than ever, in part thanks to the publicity which the crash created for the digital token. Indeed, the price of a Bitcoin today (October 2016) is nearly equivalent to its price at the height before its last crash and continues to grow steadily. Bitcoin will survive simply because it is the trend of the future, much like Uber has performed beyond expectation. The key is, if you have Bitcoin and its value has fallen a bit since you obtained it, hang on to it as its price will revert upwards sometime in the future. #ilovebitcoin

Jan MarekAugust 13, 2017 at 5:33 pm

4190 USD … 😀

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